The Chancellor sets out to woo world's business

Corporation tax at 22 per cent is designed to lure firms to the UK. Will it work, asks James Moore

In 2010 the Conservatives and Liberal Democrats stated in the agreement that created their coalition: "Our aim is to create the most competitive tax regime in the G20."

According to Oxford University's Centre for Business Taxation, the Chancellor, George Osborne, has gone some way towards doing that with the cuts to corporation tax announced in last week's Budget.

In 2014, when the UK's corporation tax rate will hit a low of 22 per cent, only Saudi Arabia, Russia and Turkey among G20 members will be lower (at 20 per cent, see graphic). As locations for international business, none of them comes free of drawbacks.

In terms of the "effective" tax rate (which includes various other factors), the UK will slip to sixth, with South Korea and Italy just ahead. But Mr Osborne has made clear his desire to cut corporation tax to 20 per cent when it becomes affordable, so a further rise up the rankings could be due – although we should not forget the fact that, by taking a short hop across the Irish Sea, companies can enjoy a 12.5 per cent rate in the Irish Republic.

So how long will it be before the UK sees the benefits of new businesses coming here?

Professor Michael Devereux, the Oxford centre's director, says: "The average rate of corporation tax over the past 30 years has fallen from 47 per cent in the early 1980s to 27 per cent now. We are not the only people reducing tax, but there have been periods of more aggressive competition than we see now.

"We know President Obama has made proposals for a cut in the US, but getting anything done in the States is not easy. One thing that is holding more aggressive competition up is the US and the fact that they have a worldwide tax system. American companies have to top up their rates. Empirical evidence suggests there is a strong correlation between location and tax, so it will have an effect."

He adds: "The issue of Ireland is tricky. In the past, it has attracted large companies – Google, Microsoft, for their European headquarters – but we have lived with that for three decades. The UK has more people, proximity to the City, it's a bigger market. There are lots or reasons to be here.

"It tends to be that larger countries are able to charge higher tax rates because of this."

Stella Amiss, an international tax partner at PWC, also says the tax cut will make a difference for the UK, even with its proximity to Ireland. That is because companies tend to look at an overall package rather than just tax. And our main competitors might not be in a position to respond.

"Companies don't move just on that tax alone and we are never going to go to 12.5 per cent, like Ireland. That doesn't make sense. In the round, the cut really does make the UK a competitive system," she says.

Will other countries follow? "Places such as the Netherlands have incentives in some areas, and theirs are typically more generous than ours.

"But can others afford to respond? We have been doing it gradually. Germany, France, the US, they can't afford to take a hit like 10 per cent in one go."

She adds: "It isn't just tax rates, either. Business will ask, 'Do I have a stable regime?' If you look at France, for example, they are awful. Before Christmas, there were four changes in three months. Comparing France with the UK, it is a no brainer."

Bill Dodwell, the head of tax policy at Deloitte, also says a corporation tax war in response to the UK move is unlikely to happen. At least for now: "I think it is probably worth saying that other countries have a choice to make. Whereas Ireland, in having to raise money, has put up personal tax and VAT to keep its treasured 12.5 per cent rate, countries such as France have done the opposite."

He adds: "For normal countries, the UK has the most competitive tax regime in Europe. It compares very well with France, Germany, Italy and even the Netherlands."

And Ireland? "Ireland is where it is. It has a very competitive corporate regime but it is a very small economy and it doesn't have the advantages we have in the UK."

So it appears that the Chancellor's move is all but risk-free. Competitors don't really have the flexibility to follow suit. Richard Woolhouse, the head of tax and fiscal policy at the CBI, says: "There is a long debate about the so-called race to the [corporate tax] bottom. You've had falling rates around the world for 20 to 30 years. But you haven't seen falling tax receipts."

He also points to GlaxoSmithKline's announcement of plans to set up a new factory in Cumbria as evidence that UK tax policy is working.

"Three or four years ago, companies such as WPP and Shire left despite a middle-of-the-pack tax rate here. There is anecdotal evidence now that companies are not moving, and one or two are coming back. The tax rate is an important part of the shop window to show we are open for business."

Other than Glaxo, how quickly will that window attract customers? With a squeezed and unhappy electorate quietly fuming at the millionaire's tax cut of 5p off the top rate, Mr Osborne needs them before the next election.